Africa Weekly Review: Margin loans in Nigeria and a ratings review of South Africa.

Nigeria: A welcome disclosure on stock market loans

Access Bank has become the first Nigerian bank to supply information on its exposure to margin loans. In its presentation of 31 October on its second quarter results (July-September 2008), Access produced a total figure of NGN55.7 billion (US$470 million), equivalent to 18 per cent of all its loans and advances. The total collateral held against these loans was NGN69.8 billion (US$590 million).

Shrinking value of collateral

This headroom of about 25 per cent had evaporated by 7 November, if we use the All-Share Index as our measure for the valuation of the collateral held by Access. For the sake of charity, we could claim that the sharp fall in the index since the Nigerian Stock Exchange removed the circuit-breaker (the one per cent cap on daily downward equity price movements) on 28 October has come to an end.

Access shows margin loans with “one way out” for the bank (the collateral) at NGN40.8 billion and those with “two ways out” (the collateral and cash flow from another source) at NGN16.7 billion. (It does not explain why the sum of the two parts exceeds the whole.) Another revelation is that the average margin loan was NGN720 million. This reinforces the suspicion that the banks have lent with too few questions asked of a small number of well-connected stock market investors.

Access, one of 17 listed banks, is to be applauded for its disclosure. We hope its step will be copied by the other banks. It may have taken the step in the belief that its exposure to margin loans compares favourably with the industry as a whole. Even if this was not the case, the data raise questions about the comment of Tunde Limo, a deputy governor at the Central Bank of Nigeria (CBN), that the sector average for margin loans was 10 per cent of total loans and advances.

Support from the CBN

It now becomes clear why the CBN issued its circular on 2 October allowing banks to extend their loans for stock market purchases to the end of 2009. Without extending the maturity of such loans, the banks would normally have had to sell borrowers’ collateral to maintain their margins, which would then have brought further downward pressure on the market.

The banks have pushed margin loans and other forms of credit because, having raised up to US$15 billion in new capital in three years, they needed to deploy the loanable funds rapidly so as to maintain returns on capital employed. Credit quality clearly suffered in the process. The weight of margin loans is less than in many emerging markets, particularly transition economies.

There will be a price to pay in the form of loan provisions. Yet the Nigerian bank sector has a number of defensive properties such as strong capital and liquidity ratios. Private credit is still little more than 20 per cent of GDP. Since the non-oil economy has good growth prospects, banks can now build their loan books in a strong economy while maintaining credit discipline.

South Africa: Change to negative outlook from Fitch

On Monday morning, Fitch announced a change in the outlook on its sovereign rating from stable to negative. Its rating for the government’s long-term foreign currency obligations remains BBB+, the same as S&P which maintains a stable outlook.

We will shortly produce a House View on South Africa’s vulnerability to the global turmoil: this will look at the current account deficit and its financing, the soundness of the banking sector and the importance of external credit lines. This week we will confine ourselves to two comments and two pieces of data.

Fitch busy with the red pen across EMs

This morning was particularly busy for Fitch, which moved the outlook for several other sovereigns to negative (including Russia and South Korea) and downgraded a number of others (including Hungary and Romania). The ratings agency has reappraised sovereign risk across the emerging markets universe in the light of the turmoil.

Our second comment is that the currency market in South Africa this morning was driven by the stimulus package of up to US$600 billion announced by the Chinese government over the weekend. The impact of the statement from Beijing (positive) dwarfed that of the change in outlook (negative).

South Africa did not escape Fitch’s review of EM risk because it has a current account deficit, which is set to exceed 7 per cent of GDP this year, and because it depends heavily on portfolio flows to finance the deficit. Year to date, those flows have been negative to the tune of ZAR49 billion (US$4.9 billion) and ZAR12 billion (US$1.2 billion) on equities and bonds respectively. In 2007 (year) there was a net combined inflow of ZAR83 billion.

No official desire to defend the currency

Our second data selection is also a negative. The net reserves of the South African Reserve Bank declined by US$1.5 billion to US$32.1 billion in October. This was the first significant monthly decrease for several years. It consisted of US$600 million in gold and US$900 million in foreign exchange. There is no evidence that SARB entered the market to support the rand, which depreciated by 23 per cent in relation to the dollar in October. The authorities are most unlikely to intervene in the market, and tend to regard the rand exchange rate as the “shock absorber” which will bring a current account adjustment. The decrease in reserves in October was largely due to the relative strength of the dollar in the period.

Our instinctive call ahead of our House View is that South Africa has a sound macroeconomic framework and a well regulated banking sector to distinguish it from many of the sovereigns whose outlooks and ratings were revised by Fitch. It also has protection from the remaining controls on offshore investment by resident institutional investors.

Recent research reports:

Niger Delta: The political leadership needed to overcome deeply rooted problems is absent.
The administration in Abuja and the state and local governments have different agendas.

Nigeria Quarterly: The non-oil economy is robust despite falling crude prices.
Time for the presidency to show leadership and direction.

South Africa Quarterly: Policy continuity until the elections.
Strong public investment staves off recession.

With best regards,

Gregory Kronsten
Director, Africa Research
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